Adjusted Basis
What Is Adjusted Basis?
Adjusted basis is the original cost of an asset after accounting for certain adjustments such as improvements, depreciation, or other allowable changes.
It is used to determine the gain or loss when an asset is sold.
Why It Matters
Adjusted basis affects how much capital gain or loss must be reported when selling an asset.
Tracking adjustments helps ensure accurate tax reporting and prevents overpaying taxes.
How Adjusted Basis Works
Adjusted basis begins with the original cost basis and is modified over time.
Common adjustments include:
- capital improvements that increase value
- depreciation deductions
- certain tax credits or reimbursements
These adjustments change the value used when calculating capital gains or losses.
Example
If an investor buys property for $200,000 and later spends $30,000 on improvements, the adjusted basis becomes $230,000.
Adjusted Basis vs Cost Basis
- Cost basis is the original purchase price of an asset.
- Adjusted basis reflects changes made to that value over time.
FAQs About Adjusted Basis
Why is adjusted basis important when selling property?
It determines the capital gain or loss.
Do home improvements affect adjusted basis?
Yes. Qualifying improvements may increase the basis.
Does depreciation affect adjusted basis?
Yes. Depreciation typically reduces the basis.
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